Brexit – Pondering the significance of the outcome

For the ruling elite, Brexit signals the need to limit democracy to ensure important decisions are left to self-declared experts.

No 1713 Posted by fw, June 28, 2016

Satyajit Das

“The Brexit debate has made unprecedented demands on vocabulary, adjectives and hyperbole. The word ‘historical’ is exhausted. The only fact is that a majority of those who voted have elected for Great Britain to leave the European Union. All else is conjecture. Few political analysts, super-forecasters, pollsters, betting shops and financial markets anticipated the result. Undaunted, the same people are now outlining the consequences and likely outcomes. Although close reading indicates that the trite consensus is ‘uncertainty’. Familiarity with four words – ‘I do not know’- is sadly lacking. Perhaps the most interesting commentary after the vote was the gallows humour of traders: ‘Brexit could be followed by Grexit, Departugal, Italeave, Czechout, Oustria, Finish, Slovakout, Latervia and Byegium. Looks like only Remania will stay.’” —Satyajit Das

A devilishly delicious analysis of the Brexit debate and shocking outcome from Das, former banker, now risk manager who was the first to warn about the 2008 derivatives meltdown. Let his concluding paragraph serve as a warning to all: of course, like all warnings, it will be either completely ignored or soon forgotten —

“If the deep seated economic and social divisions within Britain or other societies cannot be dealt with peacefully and through existing processes, the risk is that it will unleash the furies of nationalism and isolationism in unknown ways and with unpredictable results.”

Below is a repost of Das’ article in today’s Naked Capitalism. The highlighted text was added to bring key ideas to the fore. To read his original musings, click on the following linked title.

The Brexit debate has made unprecedented demands on vocabulary, adjectives and hyperbole. The word ‘historical’ is exhausted.

The only fact is that a majority of those who voted have elected for Great Britain to leave the European Union. All else is conjecture.

Few political analysts, super-forecasters, pollsters, betting shops and financial markets anticipated the result. Undaunted, the same people are now outlining the consequences and likely outcomes. Although close reading indicates that the trite consensus is ‘uncertainty’. Familiarity with four words – “I do not know”- is sadly lacking.

Perhaps the most interesting commentary after the vote was the gallows humour of traders: “Brexit could be followed by Grexit, Departugal, Italeave, Czechout, Oustria, Finish, Slovakout, Latervia and Byegium. Looks like only Remania will stay”.

When they sit down to provide the final verdict on 23 June 2016, future historians will ponder several issues.

First, the fact that the referendum was called will cause bafflement. Conservative leader David Cameron pledged to hold the referendum to placate anti-EU sections of his own party and out-flank a perceived challenge from the U.K. Independence Party. Given his frequent mention of the risks of Brexit, the wisdom of calling the referendum in the first place remains puzzling.

David Cameron, who did much to make the Tories electable and won a famous victory, has gone, leaving behind a divided Conservative party. The Labour Party too are damaged and may acquire a new leader. Its support of the Remain campaign put it at odds with its core constituencies. The episode has left behind a divided country, which will prove difficult to unite or even hold together.

Second, the unedifying debate will merit careful analysis. The tone was shrill, lacking civility. The shooting of one MP was a symptom of the febrile atmosphere created.

The participation of respected analysts, commentators and supposedly non-political public officials brought them no credit. Facts were water-boarded to support partisan positions. A future of economic damnation outside the EU and a revival of Empire without it are equally illusory. A debate about immigration policy is not automatically racist in nature.

Foreign plenipotentiaries, including the US President, weighed in with advice on how the British should vote. One European government took out newspaper ads seeking to influence the vote. There will be speculation on the effects of these unprecedented interventions on the result.

Third, the surprise at the result among those who voted to remain will be scrutinised. The wilful ignorance of the affluent, educated and cosmopolitan on how divided and polarised British society has become is striking. The voting patterns mirrored divisions along the lines of class, economic standing, education, age, residence and ethnicity.

The debate was always between economics and sovereignty (in the guise of immigration and border control). Exaggerated claims of economic losses, based on macro-economic models which have failed repeatedly over recent years, to engender fear were rejected. Interestingly, some UK regions reliant on exports to the EU voted strongly to leave.

For the disenfranchised, the fruits of growth, investment and international trade remain unattainable. Threats, perceived or real, to jobs and uncertainty about nationality are powerful. The inconvenience of the Non-EU line at immigration, freedom of movement or ability to own a holiday retreat does not concern those who do not have those opportunities. As one voter told the Guardian with stunning simplicity: “If you’ve got money, you vote in … if you haven’t got money, you vote out”.

Fourth,the significance of the ultimate decision on core beliefs will be eagerly studied.

The failure of the economic arguments to sway the vote may spell the end of economic rationalism which began with Margaret Thatcher and Ronald Reagan. It may be that the vote against the EU was in part a protest vote against the long term changes in economic structure of the UK economy which has destroyed many working and middle class lives.

Insofar as the decision represents a retreat to economic nationalism and closed borders, it may highlight the diminishing appeal of globalisation. Free movement of goods and services, lowering of trade barriers and cheaper foreign labour has not benefitted everybody. Conservative American politician Pat Buchanan’s observation in Pittsburgh Post Gazette on 3 January 1994 remains uncomfortably accurate: “…it is blue collar Americans whose jobs are lost when trade barriers fall, working class kids who bleed and die in Mogadishu…the best and brightest tend to escape the worst consequences of the policies they promote…This may explain …why national surveys show repeatedly that the best and wealthiest Americans are the staunchest internationalists on both security and economic issues…”

Increasing scepticism about experts and expert advice may also be one effect. The views of the governor of the Bank of England and the Archbishop of Canterbury were disregarded equally.

In a pivotal moment in the campaign, challenged to name a single expert who thought that Brexit would economically benefit Britain, Justice Secretary Michael Gove’s defiant response was that: “I think people in this country have had enough of experts.” Attacked for being anti-intellectual, Mr. Gove’s position highlighted the fact that over-reaching and arrogant experts, especially on economic matters, have been often incorrect, sometime disastrously.

The reality is that experts no longer relate to ordinary people. Policy orthodoxy, such as free trade, de-industrialisation and, in the aftermath of the 2008 crisis, austerity and unconventional monetary policy, have not benefitted large parts of the population. Ordinary people’s appetite for sacrifice in return for unquantified future benefits promised by experts has waned. The gravitational pull of aspiration, central to Margaret Thatcher and Ronald Reagan’s brand of conservatism, has faded as trickle-down economics has betrayed many people.

Fifth, the obsession with financial market effects in the aftermath of the decision will confound posterity. Markets complacently assumed that Britain would remain an EU member and backed it with other people’s money. There is no guarantee that their highly changeable views are reliable. Ascribing a 45% to Britain leaving in a result which was always binary is curious. Panic from the masters of the universe at the slightest sign of uncertainty does not support their claims for perspicacity, superiority and understanding of risk.

The immediate effects on currencies and interest rates were significant. But it will take time to see whether there are major casualties as a result of the usual highly leveraged bets or what the longer term effects are. The real economy and political effects will take time to emerge and is highly dependent on events not yet known.

The decision to downgrade the UK’s credit rating to a still very strong ‘AA’ was curious. The UK’s ability to meet its obligations have not changed. It was never part of the single currency and has the ability to create Pounds Sterling to meet its obligations. With rates near zero, the effect of any change in rating is likely to be minimal.

Sixth, history will have to decidewhether the vote was simply a mutiny on H.M.A.S Britannia or an influential one on the shape of the modern world, the structure of society and values which resonates and leading to change in other countries. If the latter proves correct, then the event will prove truly significant.

The Leave campaign may have won the vote but there is confusion about the UK’s redefined relationship with the EU. Maintaining UK’s continued special access to European markets would require accepting many policies rejected by a majority of those who voted. The decision by Boris Johnson, an Etonian like David Cameron and of similar background and leanings, to back the Leave vote showed ruthless calculation and accurate political sensitivities. His position reflected his aspirations for leadership not solidarity with the Leave voters or fundamental policy shifts. In an editorial after the vote, Mr. Johnson seized with post Brexit Bre-gret or Bre-morse suggested that wholesale changes in the relationship between the UK and the EU were now unnecessary.

The prospects of meaningful reform within the EU also seems remote. European Council President Donald Tusk, speaking for a number of Eastern European nation, admitted that the EU’s utopian visions are not shared by ordinary people. But other leaders, especially in the EU Commission, do not recognise the problem. German Foreign Minister Frank-Walter Steinmeier promised that “we won’t let anyone take Europe from us.” The unfortunate malapropism (about the “us”; whether it was the EU or Germany) highlighted a central, unresolved problem.

The EU is circling the wagons, painting Britain as a reluctant European and seeks to punish her to dissuade other nations from similar actions. EU Commission President Jean-Claude Juncker’s tart summary reflects this view: “It’s not an amicable divorce, but it never really was a close love affair anyway”.

The intellectual response is framed by cognitive dissonance. Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University, saw it as “Russian roulette for republics”. He complained that the simple majority system of those who voted (36% of eligible voters voted for leaving) was an absurdly low bar. Professor Rogoff argued that such a significant decision should not be made without appropriate checks and balance. In an editorial price for the Business Insider, American opinion-ist Josh Barro termed the decision “a tantrum”. British voters had made “a bad choice”. It was an “error of direct democracy”. Such important decisions should not be decided by voters but left to “informed” elected officials.

In essence, for those who believe they are born to rule, Brexit signals the need to limit democracy to ensure that important decisions are left to self-certified experts. European Parliament President Martin Schultz was refreshingly clear: “It is not the EU philosophy that the crowd can decide its fate”.

History may well record that little changed as a result of Brexit after the long tortured process of negotiation of the terms of withdrawal and arrangements regarding trade and other matters with the EU. Those in charge and their attendant retinues continued, as British blogger John Ward wrote in 2015, to ignore the individual, State sovereignty, debt mountains, currency realities, poverty, its responsibilities and every legal and constitutional restraint on their power.

If the deep seated economic and social divisions within Britain or other societies cannot be dealt with peacefully and through existing processes, the risk is that it will unleash the furies of nationalism and isolationism in unknown ways and with unpredictable results.